The Kremlin moves swiftly to strengthen its vertical power by giving Gazprom the green light to take over state-owned Rosneft, paving the way for the consolidation of the state’s control over the energy sector.

By Charles Gurin for The Jamestown Foundation

In yet another move apparently aimed at strengthening the Kremlin's "vertical of power" in the wake of the Beslan tragedy, President Vladimir Putin on 14 September gave a green light to the Gazprom natural gas monopoly to acquire the state-owned oil company Rosneft. Putin also gave the go-ahead to eliminate the dual-ownership system of Gazprom shares, which restricts foreign ownership of the company. The thrust of this move, however, was towards consolidating the state's control over the energy sector. This was underscored by Prime Minister Mikhail Fradkov, who told the president he had come up with a way to increase the state's stake in Gazprom from 38 per cent to a controlling one, the Moscow Times reported on 15 September. This means that the state is set to gain formal control over an entity that produces 20 per cent of the world's natural gas and owns 60 per cent of the world's gas reserves. It will soon also include Rosneft, which in July was placed under the control of one of Putin's inner circle, deputy presidential administration head Igor Sechin. At the time Sechin was named chairman of Rosneft's board of directors, some observers speculated that his appointment was part of a plan to create a giant state energy holding that would, as one newspaper put it, "completely control the export of oil from Russia and define the rules of the game on the internal market". Rosneft, however, is only Russia's fifth-largest oil producer, meaning that that in order to create such an energy giant, the state would probably have to get its hands on more oil producers. This is where Yukos comes in: Over the summer, a number of observers speculated that either Rosneft or Gazprom would wind up with Yuganskneftegaz, the embattled Yukos oil company's main production facility.

A revival of the Soviet-era oil and gas ministry?

While Gazprom CEO Alexei Miller said on Tuesday that it is not considering taking part in auctions of Yukos property should such auctions be announced, Interfax reported, some observers think otherwise. "Within the framework of Russia's gas monopoly, a first-rate state oil-extracting company will be created that will unite the extracting assets not only of Gazprom and Rosneft, but presumably also [those of] the fallen-out-of-favor Yukos," wrote the Politcom website's Natalya Ratnikova on Tuesday. Some analysts viewed the plan to amalgamate Gazprom and Rosneft into a large state energy holding as an attempt to create a Russian version of Saudi Arabia's Aramco, while others, like Moscow's private MDM bank, saw it as a revival of the Soviet-era Ministry of Oil and Gas, according to the Moscow Times. Whatever the case, it is probably not coincidental that the Kremlin's moves to consolidate control over the energy sector came just one day after Putin announced, in the name of mobilizing all of the country's resources to fight terrorism, a sweeping political restructuring plan under which Russia's governors and other regional leaders will be appointed by the president, rather than popularly elected, and single-mandate State Duma seats will be abolished, leaving only deputies elected from party lists.

A ‘new level’ of terrorism

During a special cabinet meeting on 13 September, Putin also ordered the creation of a "crisis management system geared to the terrorist war that is being waged against Russia" and the creation of a special Federal Commission for the North Caucasus, to be headed by Dmitry Kozak, who has been named to replace Vladimir Yakovlev as presidential envoy to the Southern Federal District. Kozak's commission, Putin said, will have "broad powers" to coordinate federal ministries and security bodies, and Kozak himself will be given "powers in the sphere of security necessary for prompt reaction to the threat of terrorist attacks". Putin also called for banning "extremist organizations which use religious, nationalist, and any other lexicon but are in fact the breeding ground of terror" and prosecuting their leaders and "active members", RIA Novosti reported on Monday. Meanwhile, Finance Minister Alexei Kudrin announced that because terrorism has "reached a new level", spending for the Interior Ministry (MVD), Federal Security Service (FSB), Foreign Intelligence Service (SVR), the Federal Guards Service (FSO), and the Federal Border Guard Service (FPS) will be increased by around 50 billion rubles (US$1.7 billion) - an increase of almost 50 per cent - while funding for the Defense Ministry will go up by 107 billion rubles (US$3.66 billion). Kudrin also said that additional federal funds would be earmarked for cities with subways, which have been targeted by terrorists.

Unconstitutional, undemocratic

Putin's plan to appoint governors and abolish single-mandate Duma seats was immediately criticized by independent Duma deputies, liberal politicians, and the media as anti-constitutional and undemocratic. The critics also predicted that the moves would do nothing to make the country safer from terrorist attacks. Likewise, US Secretary of State Colin Powell said the changes announced by Putin amounted to "pulling back on some of the democratic reforms." He further explained, "We understand the need to fight against terrorism . . . but in an attempt to go after terrorists I think one has to strike a proper balance to make sure that you don't move in a direction that takes you away from the democratic reforms or the democratic process", Reuters reported on Tuesday. Responding to Powell, Russian Foreign Minister Sergei Lavrov said that the "administrative" and "legislative" reforms and "processes" taking place in Russia are its own business. He said it was "strange" that Powell should view any actions that do not correspond to democracy, as it is understood in one particular country - the US - as a retreat from democracy. "We do not criticize such 'retreats' from the norms of democracy as indirect elections for the president of the United States," Lavrov said. "Therefore our programs, our processes, and projects are also the internal affair of our country", RIA Novosti reported on Wednesday.

This article originally appeared in Eurasia Daily Monitor, published by The Jamestown Foundation in Washington, DC., at (www.Jamestown.org). Foundation is an independent, nonpartisan organization supported by tax-deductible contributions from corporations, foundations, and individuals.

Editor's NotesAssuming the new mega-corp is considered a private corporation, albeit with one with a state-owned controlling share, that would almost undoubtedly make it the largest the private oil and gas corporation, judged by reserve figures, in the world.
See here for some earlier stats:
www.scaruffi.com/politics/oil.html